LEHMAN BROTHERS:

TOO BIG TO FAIL?

WHO ARE THE

LEHMAN BROTHERS?

COMPANY
BACKGROUN
D

The Lehman Brothers

founded in 1850.

was

From then on, the firm was a

leader in global finances.
They had headquarters in New
York, London, and Tokyo as well
as a network of offices all over
the world.

They were global

services firm.

financial

COMPANY
BACKGROUN
D

The Lehman Brothers, prior to

2008 was the fourth largest
investment bank in the United
States.
They focused on serving the
financial needs of corporations,
governments,
municipalities,
and high net-worth individuals.

High net-worth individual: An individual

whose assets exceed his/her liabilities in
value by a large figure.

OBJECTIVES

Identify the
Develop and
factors that
suggest
caused the
preventive
collapse of
measures
the Lehman
based on the
Discuss howassumptions
Brothers.
taking too
given.
much risk
affected the
company

CASE FACTS

Richard
Fuld
CEO

CASE FACTS
Who were
involved?
Executives

Auditors

Unethical Management
Practices
CASE FACTS
Factors
Repo 105: An accounting
trick in which a company
classifies a short-term
loan as a sale and
subsequently uses the
cash proceeds from said
sale to reduce its
liabilities.

Managers of Lehman used unacceptable

accounting practices along with blatant
disregard
for
prudent
corporate
governance practices. Lehman employed
window
dressing
and
Repo
105
transactions to enhance the firms
financial health.
Payment of excessive bonuses prior to
failure: within eight years, Fuld was said
to have paid himself $300 million dollars
in pay and bonuses
and Lehmans
executives were reported to have
increased their bonuses significantly to
$480 million.

Liquidity Crisis

CASE FACTS
Factors

They shifted towards making money from

long-term investments. As such, they
were unable to meet short term
obligations despite the high asset base.

Leveraging

Lehmans high leverage ratio has

increased from 20 in 2004 to 44:1. This
means that for every $1 of cash and other
available financial resources, Lehman
would lend $44.

Incompetent Executives
10

Lehman's
Board
of
Directors
was
inexperienced at overseeing a diversified
investment bank holding company. Only
one outside member had any background

Collateralized Debt
Obligations
CASE FACTS
Factors

11

They invested heavily in commercial real

estate which they thought was immune
from the growing problems in the
residential
housing
sector.
They
maintained an optimistic view of the
portfolio's worth despite growing evidence
that this sector was also in trouble.
Subprime Mortgage Crisis: The expansion
of
household
debt
was
financed
withmortgage-backed
securities(MBS)
andcollateralized debt obligations(CDO).
Due to the higher interest rates on the
mortgages; however, the lower credit
quality
ultimately
caused
massive
defaults.

CASE FACTS
Factors

12

Unsuccessful
Attempts

Takeover

In early August Lehman thought it had a

deal to sell a 25% stake in the company
to the Korean Development Bank at $22 a
share. The stock continued to slide to
under $10 a share and the expected deal
cratered.
Another possible deal involved Barclay's
Bank. However, Barclays would need a
waiver from the Financial Services
Authority (FSA) in the U.K., which the FSA
was not likely to grant.

CASE FACTS
The
Bankruptcy

13

On September 13, 2008, Timothy F.

Geithner,
the president of the
Federal reserve bank of New York
called a meeting on the future of
Lehman
On September 14, 2008, The New
York Times reported that Barclays
had ended its bid to purchase all or
part of Lehman and a deal to rescue
the bank from liquidation collapsed.
Finally on September 15,2008
Lehman
Brothers
filed
for
bankruptcy protection after failing
to find a buyer.